$1 Trillion Loss to Pension Funds Could Cost Taxpayers

SANTA FE, N.M. -- Massive investment losses sustained by public pension funds are pressuring state lawmakers from New Mexico to New York to spend more taxpayer money to shore up their programs, boost the retirement age for newly hired government workers and seek more from employee paychecks.

Pensions need $270 billion in additional contributions over the next four years, and more than $100 billion annually for two decades hence, according to the Center for Retirement Research at Boston College.

The pension trouble is just one more economic challenge for states. Income and sales tax collections are dropping fast as unemployment rises. Jobless benefits funds are running dry, requiring federal borrowing. And because of substantial budget holes, states are cutting back on a wide range of services, including child care subsidies for low-income families and aid to public schools, and in some cases laying off workers.

But as bad as the budget picture looks, it is dwarfed by the size of the gaps in states' pensions, which have collectively lost at least $1 trillion as financial markets swooned over the past year. Public pensions cover about 14 million state and local employees and paid out almost $163 billion to seven million retirees in 2006-2007, according to the Census Bureau.

Because pensions involve long-term obligations and investments, there's no immediate risk that states will be unable to pay retiree benefits. But replenishing pensions could squeeze states for years to come, forcing lawmakers and governors to juggle their spending priorities -- pitting pensions against schools, colleges, health care, prisons and other government services.

"What you hear concern about out there right now is, 'We the taxpayers are going to be stuck with a bill paying for public pensions. And we don't want taxes raised to pay for public pensions.' And that is understandable," says Mike Burnside, executive director of the Kentucky Retirement Systems.

Pensions covering state and local workers, police and teachers in Kentucky have unfunded liabilities of $27 billion. In response, lawmakers agreed last year to increase taxpayer funding and change eligibility for newly hired employees. But budget problems, Burnside said, could undermine the state's ability to boost pension funding.

It's up to legislatures to appropriate money to cover pension funding for state workers. With questions swirling around the future of public employee pensions nationally, legislation is pending in at least 28 states to change funding and benefits:

-- In New Mexico, where pensions for educators and state employees are underfunded by a combined $4.6 billion, lawmakers approved longer work requirements for public employees hired starting in 2010. They'll be able to retire with full benefits at any age after working 30 years, up from 25 years. Current workers will pay an extra 1.5 percent into their pension plans and higher amounts for retiree health care.

-- In New York, Gov. David Paterson has proposed increasing the minimum retirement age for new hires to 62, up from 55.

-- In West Virginia, whose pension fund for teachers has a $4 billion shortfall, the governor has proposed additional taxpayer money to close the gap.

-- Illinois, Oklahoma and Florida are among a half dozen states considering defined contribution pension plans, like a 401(k), for public employees rather than automatically enrolling them in a traditional defined benefit pension that pays a guaranteed annuity to retirees.

Two states -- Alaska and Michigan -- have dropped defined benefit programs for at least some newly hired public employees, according to the National Association of State Retirement Administrators. But slashing benefits for current workers isn't an option for states because statutory or constitutional provisions usually safeguard an employee's earned benefits.

Private sector pensions are also hurting. There was a $400 billion funding deficit at the end of 2008 for pensions at 1,500 U.S. companies of all sizes representing about 85 percent of the stock market, according to Mercer, a global consulting firm.

The gap is likely to accelerate a trend of corporations dropping defined benefit plans in favor of defined contribution plans, according to Adrian Hartshorn, a principal in Mercer's Financial Strategy Group in New York. Companies also will be forced to make higher pension contributions. Workers usually don't pay in to private pensions.

Public employees and their unions are fighting measures that would reduce the value of their compensation packages, such as higher payroll contributions for health care or pensions.

Leslie Boyadjian, a 7th grade social studies teacher in Albuquerque, estimates that higher pension payments approved by New Mexico lawmakers and expected increases for health care could cost her $1,000 a year.

The market value of state and local pension fund assets has declined by a third, from a peak of about $3.3 trillion in the fall of 2007 to $2.4 trillion at the end December, according to the retirement administrators association. The S&P 500 index dropped 41 percent during the same time.

Investment earnings account for $4 of every $5 in pension financing, according to the Census Bureau. The rest comes from employee and government contributions.

Almost three-fifths of public pension fund assets were invested in domestic and international stocks and slightly more than a quarter in bonds. The rest of pension investments were in real estate and alternatives, including private equities, hedge funds and cash.

Because of the way accountants measure the value of pensions, market losses and gains are averaged over several years. That will give states more time to respond to the recent financial market meltdown.

However, a prolonged recession will make it more difficult for states to rebuild their pension funds through future market gains and will add pressure for more taxpayer funding through payroll contributions, according to one pension expert.

"I don't think they can invest their way out of it," says Alicia Munnell, director of Boston College's Center for Retirement Research.

SANTA FE, N.M. -- Massive investment losses sustained by public pension funds are pressuring state lawmakers from New Mexico to New York to spend more taxpayer money to shore up their programs, boost the retirement age for newly hired government workers and seek more from...